Finance is a game of inches

Sports matches are often decided by little things. Football is the ultimate game of inches. The quarterback gets the pass off a split second before he’s crushed by a blitzing linebacker and the receiver snags the game-winning catch just beyond the defender’s out-stretched fingertips.

Personal finance is also a game of inches.

In his book Stop Over-thinking Your Money, Preet Banerjee outlines five simple rules of financial success. As in football, in personal finance the little, simple things are often the difference between winning and losing.

There is too much financial information out there, far more than we need to make good decisions – protecting your family and securing your future.

“The good news,” Banerjee writes, “is that of all of the information out there in the world of personal finance, at most you will only need to know about 20 per cent of it. That small amount of knowledge will put you ahead of most Canadians.”

I contend that you need far less than 10 per cent of the information that’s available. There is a lot of noise out there that means nothing to your success and distracts you from what’s really important.

It’s like drinking from a fire hose.

Banerjee’s five simple rules are: disaster-proof your life, spend less than you earn, aggressively pay down high-interest debt, read the fine print on contracts you sign and delay consumption.

Notice that he doesn’t mention picking the right stocks or mutual funds, or being a do-it-yourself investor to save a little on your investments. Those things are insignificant compared to what really matters.

“The fifth rule – delay consumption – is probably the hardest to implement in the beginning,” Banerjee says, “but it becomes self-reinforcing over time. We’ve all sometimes been tempted to keep up with the Joneses…but we shouldn’t, because they’re headed for a cliff….(they) might be up to their eyeballs in debt, not sleeping at night and living on a knife’s edge.”

Most Canadians live in financial stress. Half of us live from paycheque to paycheque, at risk of losing it all if a big mishap occurs. Most fall short of their financial goals. One of the biggest reasons is our over spending.

Don’t compare yourself with folks who have an expensive car sitting in the driveway of a large house they can’t afford, and are in financial trouble. By delaying excess consumption, you’ll be able to spend money on things that are more important, and actually contribute to your financial security and long-term well-being.

I have clients I’ll call Pat and Faye, who are in their late 50s. Both are still working although they could retire now. They regularly travel outside of Canada. Their daughter and husband recently bought their first house and the parents contributed $15,000 toward the down payment. They’ll do the same for their other two children, and contribute to weddings.

Pat and Faye have never felt the need to have the newest, best stuff. They live in a nice, but modest, house. They could afford twice the house, but are content.

In an example Banerjee uses, they could afford an expensive car at $800 a month, but 95 per cent of its use is taking a person to and from work. Instead, they own a small, compact car that does the same job for $200 a month. They’d pay less for insurance and gas – a saving, Banerjee estimates, at $700 a month.

That’s $700 a month on just one item. We blow money on many things each month. In total, these potential spending cuts can make up total savings of $10,000 to $20,000 a year.

Divert that money to insurance to protect your family from disaster, to properly fund your retirement savings and the education of your children and other things that really contribute to long-term financial well-being. If you don’t have enough for the retirement of your dreams and for other financial goals, maybe it’s because of the hundreds of thousands of dollars you’ve been squandering on stuff that doesn’t matter.

Banerjee compares getting your finances in order to getting physically fit, as both require discipline. “If it was easy everyone would have an enviable six pack and everyone would have more income than expenses,” he says. “No one is going to flip the switch for you. You have to want it.”